RIL entitled to recover costs on unviable gas finds: Parliament panel

Parliament’s Public Accounts Committee holds Reliance Industries Ltd (RIL) is entitled to recover all costs

incurred on unviable gas discoveries since the government’s directorate general of Hydrocarbons had

allowed the company to retain the entire KG-D6 block area in the first place.

The PAC report, tabled in the Lok Sabha on Thursday, has thus gone against India’s official auditor, which

in 2011, had criticised the petroleum ministry for allowing RIL to retain its entire eastern offshore KG-D6

block, in contravention of the production sharing contract (PSC) under which only the area where

discovery is made is permitted to be retained after the exploration period.

“The exploration costs incurred by the contractor (RIL) on unviable discoveries cannot be disallowed as

the contractor is entitled to recovery contract cost out of a percentage of total value of petroleum

produced and saved from the contract area as per the PSC,” the report said.

It said that management committee of the block in question comprising of officials of both the ministry

and its technical arm, DGH, had on the request of the company allowed it to retain the entire block area

as discovery area.

“We recommend that the ministry of petroleum and natural gas should review the determination of the

entire contract area as ‘discovery area’ strictly in terms of the PSC provisions,” the Comptroller and

Auditor General (CAG) had said in its report, asking for delineation of the discovery area and surrender

of the rest.

The petroleum ministry had disallowed RIL $2.3 billion of expenditure as penalty for gas output from KG-

D6 falling behind targets owing to non-drilling of number of wells earlier committed by the operator.

“The committee find that the contractor has invoked arbitration in almost all the cases where

government has disallowed the costs,” said the PAC report.

It noted that the “ministry in their submission before the committee agreed that there were anomalies

in the provisions” of the PSC.

“The committee while appreciating that the ministry has learnt its lessons are apprehensive about the

status of issues between the government and the contractors that have been lingering on due to the

original provisions which have now been relaxed.

“The committee are of the view that a strong dispute resolution mechanism should be put in place to

address the concerns of both parties,” the report added.

The PAC, which heard all parties in the issue, said that to their query on how to reduce litigations and

arbitrations, the ministry representative replied that under the government’s new policy where it has

moved away from the production-sharing to the revenue-sharing contract, it will not look at the day-to-

day management like cost recovery and other things.

“It would only be interested as to how much production operator is doing; how much revenue he is

getting; and out of which, how much he will share with the government which he has to declare upfront

in a formula while bidding and that will be followed,” the report said.

The union cabinet last month approved the new policy for oil and gas exploration that will now be based

on a revenue-sharing model, as opposed to the existing cost-and-output-based norms.

NGS INDIA